Cash Flow to Debt Ratio

This is a detailed guide on how to calculate Cash Flow to Debt (CF/D) ratio with thorough interpretation, example, and analysis. You will learn how to utilize its formula to evaluate a company's solvency.

Definition - What is Cash Flow to Debt Ratio?

When your investment analysis calls for measuring a company’s cash flow against its fixed debt payments, you can use a solvency ratio called the cash flow to debt ratio (CF/D), or cash flow to total liabilities ratio.

This ratio illustrates how much of the money flowing into a business is available to meet its debt commitments.​

In other words, if a company were to devote all of its cash flow from operations to repaying its debts, the time required to pay everything off could be estimated by looking at the value of its cash flow to total debt ratio.

This solvency ratio also offers some idea of whether or not a company is in the position to take on additional loans, should the need arise.

In general, the higher the ratio is, the more capable a business is of supporting and sustaining its ongoing short-term and long-term debt obligations.



The formula for calculating a firm’s cash flow to debt ratio looks like this:

cash flow to debt ratio formula

CF/D Ratio = Operating Cash Flow / Total Liabilities

As you can see in the formula above, the ratio is calculated by taking ​a company's operating cash flow and dividing it by the total liabilities.

For this reason, the cash flow to total debt ratio is also known as the cash flow from operations to total liabilities ratio.

You’ll notice that this calculation doesn’t take a company’s full earnings into account, but considers only the amount of those earnings that are available in cash to service its debt load.

Non-cash expenses and sales would include any amounts related to asset amortization and depreciation.

Read also:​ Debt Ratio - Formula, Example & Analysis

Cash Flow to Debt Ratio Calculator


​Now let's consider this example so you can understand clearly how to work out the cash to debt ratio.

Company X has been operating for many years, and has all the appearances of a successful and growing business.

You’re considering buying stock in Company X, and would like to evaluate its debt coverage ability.

A thorough study of the firm’s financial statements reveals the following information:

  • Operating Cash Flow (OCF) = $1,000,000
  • Debt Payments = $1,150,000
  • Lease Payments = $2,500

You can now use these figures and the formula given above to calculate Company X’s cash to total debt ratio, as follows:

cash flow to debt ratio calculation

From this result, you can see that Company X has debt payments in excess of its cash from operations, since its cash flow only covers 87% of its total debt.

Interpretation & Analysis

Okay now let's consider how the CF/D ratio is used to evaluate a company's solvency.

While a cash flow to total debt ratio well above 1, or 100%, tells you that a company has ample cash available to service its debts, that doesn’t necessarily mean that a value of less than 1 should be avoided where a potential investment is concerned.

Certainly, in some situations, it can indicate too much debt or a lack of financial strength, but you should always consider the results of the cash to total liabilities ratio in light of a firm’s historical performance.

When a ratio is low, it’s important to find out why, before dismissing it as unacceptable.

Studying past cash flow to total liabilities ratio results can help to confirm the viability of a low ratio, or alternatively, may help to pinpoint negative trends or warning signs.

Many large and successful corporations operate with cash to debt ratio values of less than 1, and these are warranted in many cases.

Cautions & Further Explanation

You should bear in mind that the cash flow to total liabilities ratio provides only a snapshot of a company’s financial health at any point in time.

Because the total debt figure used in the ratio includes short-term debts and long-term debts, as well as the current portion of any longer term obligations, the final value can fluctuate from one measurement period to another.

To get the most accurate picture from the cash to debt ratio, it’s best to estimate any debt obligations over the period being measured, in order to account for any short-term borrowings being acquired or paid off, and any recognized debt acquisitions that may be looming in the future.

Hung Nguyen

Entrepreneur, independent investor, instructor and a visionary of my team here. I've been playing with stocks and sharing my knowledge to the world. The stock market is cool, and I love it!

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